M/S. MARICO INDUSTRIES LTD,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 35, MUMBAI

At the outset, the Ld. Sr. Counsel Shri Percy Pardiwala appearing for the assessee company brought to our notice that the Hon’ble Bombay High Court in WP. No.2849 of 2008/WP. No.745 of 2009 preferred by the Department and assessee, respectively has been pleased to hold inter-alia vide order dated 28.07.2023 that the search action u/s 132(1) of the Income Tax Act, 1961 (hereinafter “the Act”) and consequent block assessment order passed u/s 158BC of the Act dated 31.12.1999, penalty levied u/s 158BFA of the Act dated 04.10.2001 and the Criminal Case No.28/SW/2004 filed by the revenue before the 4th Court of the Additional Chief Metropolitan Magistrate at Esplande Mumbai, as (renumbered Criminal Case No. 28/SW/2013 before 38th Court of Additional Chief Metropolitan Magistrate) cannot survive as they are all predicated on the existence of a valid search and quashed the criminal case (supra). In the light of the aforesaid order of the Hon’ble High Court in assessee’s own case, the Ld. Sr. Counsel submits that the block assessment order passed u/s 158BC of the Act dated 31.12.1999 framed by the AO which is foundation on which the Ld. CIT(A) has passed the impugned order cannot survive. And therefore, he pleads that the appeal of the assessee be allowed.

Per contra, the Ld. CITDR, appearing for the revenue Shri S. Srinivasu pointed out that the Hon’ble High Court while observing as (supra) had also simultaneously held at para no. 9 of the said order “even assuming that the search is to be held invalid the information or material gathered during the course thereof may be relied upon by them for making adjustment to the assessee’s income in an appropriate proceeding has merit. Though, the assessee disputes that no new information or material has been gathered by the revenue in the present case other than what is already available in its books of account, it is clarified that this order does not preclude the revenue from taking any such proceedings as they may be so advised and to utilize the information or material in such proceeding against the assessee as is permissible in law”. Referring to the observation of Hon’ble High Court, according to Ld. DR, the addition made by the AO pursuant to the assessment order framed u/s 158BC of the Act dated 31.12.1999 survives and should not be disturbed

In his rejoinder, the Ld. Sr. Counsel for assessee urged us to quash the block assessment order passed u/s 158BC of the Act, since the Hon’ble High Court has in no uncertain terms held that block assessment framed u/s 158BC of the Act doesn’t survive. So he wants us to quash the block assessment order u/s 158BC of the Act.

We have heard both the parties and perused the records. We note that the assessee company was searched u/s 132(1) of the Act on 23.10.1997. And pursuant to that statutory notice u/s 158BC of the Act was issued on 07.06.1999 and assessee filed its return in Form No.2B on 13.07.1999 declaring undisclosed income at Rs. Nil. Thereafter, the IT(SS) No.63/Mum/2001 A.Y.13.10.1988 to 04.12.1997 AO had issued notices and the assessee filed its reply. And thereafter, the AO computed the undisclosed income of the assessee for a block period from 13.10.1988 to 04.12.1997 at Rs.3,45,53,246/- (From AY. 1994-95 to AY. 1997-98 excess claim u/s 80IA of the Act). Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to dismiss the appeal of the assessee by passing the impugned order dated 16.04.2001. The assessee had assailed the impugned action of the Ld. CIT(A) before this Tribunal by raising inter-alia, the legal issue as well as addition on merits. One of the legal issue raised by assessee was against the action of the order passed by AO u/s 158BC of the Act on the ground that search action u/s 132 of the Act was without satisfying the jurisdictional condition precedent as stipulated by law. And therefore, according to the assessee, the consequent action of framing of assessment order u/s 158BC of the Act dated 31.12.1999 was invalid and bad in law. On this issue, the Tribunal passed an interim order dated 17.06.2002 directing the revenue to produce the “satisfaction note” which was the basis on which search warrant and authorization of the search u/s 132(1) of the Act was issued by the Competent Authority. This interim order of the Tribunal was challenged by the revenue before the Hon’ble High Court by filing WP. No.2849 of 2008 and pursuant to which, the assessee also filed WP. No.745/2009 wherein it challenged inter-alia the validity of the search action u/s 132 of the Act and sought quashing of the block assessment order dated 31.12.1999 passed u/s 158BC of the Act as well as penalty order dated 04.10.2001 passed u/s 158BFA of the Act dated 04.10.2001 as well as quashing of the Criminal Case filed before the Chief Metropolitan Magistrate (CMM). The Hon’ble High Court disposed off both the WP’s (supra) vide order dated 28.08.2023 and has been pleased to find that the revenue has failed to produce the satisfaction note (on the plea that relevant file got gutted down in a fire incident on 01.06.2018) on the basis of which search warrant was issued and the Hon’ble High Court held at para no. 8 “since, the revenue has failed to produce the ‘Satisfaction Note’, we have to and we hereby hold that the search action u/s 132(1) of the Act and, consequently, the block assessment order dated 31.12.1999 passed u/s 158BC of the Act, the order dated 04.10.2001 levying penalty u/s 158BFA and Criminal Case No.28/SW/2004 filed by the revenue before the 4th Court of Additional Chief Metropolitan Magistrate at Esplande, Mumbai, which is now pending as re-numbered criminal case no. 28/SW/2013 before 38th Court of Additional Chief Metropolitan Magistrate cannot survive as they are all predicated on the existence of a valid search. It is ordered accordingly. The complaint being criminal case no. 28/SW/2013 before 38th Court of Additional Chief Metropolitan Magistrate is quashed”. However, the Hon’ble High Court at para no. 9 of the order found merit in the submission of the revenue that even if the search is invalid, the information or material gathered during such search may be relied upon for making adjustment to the assessee’s income in an appropriate proceeding. And clarified that ibid order (dated 28.07.2023) does not preclude the revenue from taking any such proceedings as they may be IT(SS) No.63/Mum/2001 A.Y.13.10.1988 to 04.12.1997 so advised and to utilize the information or material in such proceeding against the assessee as is permissible in law. And it would be gainful to reproduce the entire order of the Hon’ble High Court wherein the Hon’ble High Court held as under: - “1 In the present case, on 23.10.1997, a search and seizure action was carried out at the assessee’s premises under section 132(1) of the Income tax Act, 1961 (the Act). Pursuant to the said search action a block assessment order dated 31.12.1999 was passed under section 158BC of the Act. Further penalty has also been levied under section 158BFA of the Act and prosecution proceeding has been initiated on the basis of such block assessment order and a complaint filed before the Court of Additional Chief Metropolitan Magistrate for offences allegedly committed under section 276C and 277 read with section 278B of the Act. 2 The assessee had objected to the passing of the block assessment order by filing an additional ground in the appeal filed by it before the CIT(A) from the block assessment order. In the said additional ground raised on 20.11.2000, it was urged that the jurisdictional pre-conditions in section 132(1) viz., clauses (a) to (c) thereof had not been fulfilled and that there ought to have been a valid satisfaction note justifying the ful- fillment of the requirement of the said section before the search was initiated. A copy of the said satisfaction note was sought from the Assessing Officer. In the absence of the satisfaction note, the search and consequently the block assessment order would be invalid. Since, the said additional ground did not find favour with the CIT(A), the Assessee had filed an appeal before the Tribunal wherein it raised the said ground. As this ground was fundamental to the issue of exercise of jurisdiction, the Tribunal, on 17.06.2002, was pleased to pass an order whereby they directed the Departmental Representative to produce the records containing the satisfaction recorded before issuance and authorization of the search warrant under section 132(1) of the Act.

The Revenue did not comply with the direction for close to six years and, thereafter, after the hearing on 30.10.2008 the Revenue has filed writ petition No. 2849 of 2008 seeking writ of Certiorari for quashing and setting aside the interim order dated 17.06.2002 passed by the Tribunal directing them to produce the record containing the satisfaction note. According to them, the Tribunal was not empowered to look into the said matter and, [hence, the direction was invalid. As this Court was pleased to issue rule in Revenue’s writ petition, the Assessee has filed writ petition being No.745 of 2009 challenging the validity of the search action and seeking quashing and setting aside of the consequent block assessment order dated 31.12.1999 passed under section 158BC of the Act, order dated 04.10.2001 levying penalty under section 158BFA and also the complaint being Criminal Case No.28/SW/2004 filed by the Revenue before the 4th Court of the Additional Chief Metropolitan Magistrate at Esplanade Mumbai, which is now pending as renumbered Criminal Case No. 28/SW/2013 before 38" Court of Additional Chief Metropolitan Magistrate. 4 On 30.06.2023, this Court, after hearing both the parties, was pleased to direct the Revenue to file, in a sealed envelope, the reason to believe recorded before the search action was carried out. Therein, it has also been clarified that non production of the same will invite an adverse inference being drawn. Paragraph 5 of the said order dated 30° June 2023 reads as under : “5 Before we proceed further, we direct the Revenue to file in a sealed envelope the reasons to believe. It should be made available in four sets and within four weeks with no chance of extension being granted. We say this because the order of ITAT was passed way back on 17* June 2002. Petition itself has been filed way back on 2008 by the Revenue and, therefore, since the matter would have been alive in the records of the Revenue, the Revenue should have kept these reasons to believe in safe custody to be made available in case so directed, Non production will invite adverse inference being drawn.” 5 One Preeti Hooda, the Deputy Commissioner of Income tax Circle 4(3)(1), Mumbai has filed an affidavit dated 27.07.2023 to which annexed, a letter dated 25.07.2023 from the Deputy Director of the Income tax (Investigation) Unit — 6(1), Mumbai wherein it is stated that most of the official record pertaining to the charge of the Additional Director of the Income tax (Investigation) Unit — 6, Mumbai were gutted in a fire incident on 01.06.2018. Though, it is not clear whether the concerned satisfaction note was part of the record which got destroyed by fire, it has been observed that the said satisfaction note could not be traced despite efforts made to locate the same. It may also be noted that right since the date of the fire in 2018 till today nowhere has the Revenue adverted to this incident on any of the earlier hearings. 6 It is settled law that if no reason was ascribed for search and seizure action taken under Section 132 of the Act it would be IT(SS) No.63/Mum/2001 A.Y.13.10.1988 to 04.12.1997 illegal. The exercise of power under Section 132 of the Act is a serious invasion upon the rights, privacy and freedom of the tax- payer. The courts have held that this power must be exercised strictly in accordance with law and only for the purposes for which law authorizes it to be exercised. The courts, after scrutiny, can decide on the correctness of the opinion formed by the Income Tax Officer where the action of the officer issuing authorization or of the Designated officer is challenged. The officer concerned must satisfy the Court about the regularity of his action. If the action is maliciously taken or power under the section is exercised for a collateral purpose, it is liable to be struck down by the Court. If the conditions for exercise of the power are not satisfied the proceeding is liable to be quashed. The courts have held that it is only at the stage of commencement of the assessment proceedings after completion of the search and seizure, if any, that the requisite material may have to be disclosed to the assessee. Though it is settled law that while the sufficiency or otherwise of the information cannot be examined by the court in writ jurisdiction, the existence of information and its relevance to the formation of the belief is open to judicial scrutiny because it is the foundation of the condition precedent for exercise of a serious power of search of a private property or person, to prevent violation of privacy of a citizen. It is also a settled law that the court could examine whether the reasons for the belief have a rational connection or relevant bearing to the formation of the belief and search warrant could not be issued merely with a view to making a roving or fishing enquiry.

Both petition disposed.”

In the light of the aforesaid decision of the Hon’ble High Court and [especially taking note of para no. 8 of the decision of the Hon’ble High Court (supra)], we find merit in the contention of the Ld. SR. Counsel of the assessee, and hold that the block assessment order framed by the AO u/s 158BC of the Act dated 31.12.1999 (for block period 13.10.1988 to 04.12.1997) does not survive and the legal issue (supra) raised by the assessee is held in favour of the assessee. And IT(SS) No.63/Mum/2001 A.Y.13.10.1988 to 04.12.1997 therefore, the block assessment order passed by AO dated 31.12.1999 stands quashed. Therefore, the grounds raised on merits of the addition from ground nos. 2 to 7 has become academic. And therefore, merits of additions are not adjudicated and it is added that revenue is at liberty to proceed against assessee as observed by the Hon’ble High Court at para no. 9 by their Lordship as discussed (supra) in appropriate proceedings if permissible in law and in accordance to law.

Coming to the penalty appeal [IT(SS). No. 661/M/2002 & IT(SS). No.27/Mum/2003] that has been preferred by the assessee, and the cross-appeal filed by revenue against the action of the Ld. CIT(A) partly allowing the assessee’s penalty appeal levied u/s 158BFA of the Act.

Brief facts are that the AO after passing the block assessment order on 31.12.1999 by making an addition of undisclosed income to the tune of Rs.3,45,53,246/- initiated penalty proceeding u/s 158BFA(2) of the Act and levied penalty of Rs.6,68,60,538/- @ 300% of the tax leviable on the assessed undisclosed income. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to pass the First Appellate Order dated 25.10.2002 wherein he partly allowed the appeal of the assessee and restricted the penalty at Rs.2,22,86,846/- @ 100% of the tax leviable in respect of undisclosed income. Still not satisfied by the action of the Ld. CIT(A), assessee and aggrieved by the action of Ld. CIT(A) partly allowing the penalty appeal of assessee, revenue is before this Tribunal.

As noted (supra), the assessee had challenged the levy of penalty u/s 158BFA of the Act passed by the AO dated 04.10.2001 before the Hon’ble High Court in WP. No.745/2009 (supra) and the Hon’ble High Court was pleased to hold that the search action u/s 132(1) of the Act and the consequent block assessment order framed dated 31.12.1999 passed u/s 158BC of the Act cannot survive (supra). Therefore, the penalty levied by AO which has been partially confirmed by the Ld. CIT(A) are deleted on the principle of legal Maxim “Sublato Fundamento credit opus” meaning in case foundation is removed, the super-structure falls. In the case of Badarinath Vs. Tamilnadu AIR 2000 (SC) 3243 SC the Hon’ble Supreme Court has held that once the basis of proceeding is gone, all consequential order and acts would fall on the ground automatically which is applicable to judicial and quasi-judicial proceedings.

In the light of the aforesaid discussion, the appeals of the assessee are allowed and the appeal of the revenue are dismissed.

In the result, the appeals of the assessee are allowed and the appeal of the revenue are dismissed. Order pronounced in the open court on this 25/10/2023. (PRASHANT MAHARISHI) JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 25/10/2023. Vijay Pal Singh, (Sr. PS) आदेश की प्रनिनलनि अग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. दवभागीय प्रदतदनदि, आयकर अपीलीय अदिकरण, मुंबई / DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file.